A Market Due Diligence provides acquirers with invaluable information about their potential targets, especially when this acquisition regards overseas companies and markets.

The use of Market Due Diligence offers the prospective acquirer a full image of the market issues related to the target company’s products and services.  A thorough evaluation at end user level, often allows the acquirer to leverage on a very advantageous position during the negotiation, and reaching more favorable acquisition terms.

Two case studies of companies are presented below, involving an IT and a commodity company, both in Latin America.

MARKET DUE DILIGENCE : CASE 1

HELPING AN INVESTMENT BANK MAKE A SUBSTANTIALLY GAIN ON A DEAL

The Concern

A major foreign investment bank was negotiating a 22% stake in a South American IT company for US$12 million. The prospect had assured them that; they had a 45% market share, their latest product was an outstanding breakthrough and overall, clients were very satisfied with their service.

The investment bank was not totally convinced. They visited a couple of clients, names given by the prospect, who were quite neutral on most of their remarks.

The internal due diligence, based mainly on accounting appraisals, showed a rather healthy firm.

The Solution

The investment bank requested MAGNUS LANDMANN to conduct a market due diligence.

After applying our market intelligence techniques at 28 different size end-users of these IT products and services, we learned that the prospect was having serious problems with the new product, their customer service was slow in answering calls and unable to solve pressing issues promptly.

We also discovered that the market share was 30 to 32% and not 45% and that the prospect had been losing share to two aggressive competitors with well positioned products.

Implications

The investment bank was still interested in acquiring a stake in the IT firm, however, with the outcome of the market due diligence work they had now strong ammunition to renegotiate the deal.
With the same US$12 million the investment bank negotiated a 33% participation, instead of 22%, representing millions in savings.

An executive from the investment bank put it in few words, after calculating the gain; “in a few weeks we had over 13,000% return on the investment we made with this market due diligence”. But as important as the measurable savings, was the fact that they new exactly what they were buying and generating tangible expectations.

 

MARKET DUE DILIGENCE: CASE 2

ASSISTING AN INDUSTRY ACQUIRER TO SAVE CONSIDERABLY ON THE PURCHASE PRICE

The Concern

An important international food processing industry was negotiating with a Latin American firm the purchase of their food division.

The negotiation was at around US$120 million after the technical and accounting feasibility diligence were concluded. Sales were high while profit was negligible. The categories included 4 different food lines totaling 34 products.

MAGNUS LANDMANN was asked to confirm the market information given by the seller per product, including market share, strong and weak points vis-à-vis competition and the overall image.

The Solution

Amongst the findings of this in-depth market due diligence , were:
The market practice of the seller for several products was called suicidal by competitors, clearly their objective was sales and not profit. Most products were gaining an image of cheap and at the consumer rights agency theirs was the most reported  food industry.

The company was losing distributors. All those interviewed were extremely annoyed at them for what they called unfair practices, such as selling directly to large accounts that the distributors had conquered.

The average market share was about 7% to 8% lower, however for some of the most important products the numbers given by the seller were up to 20% overstated.

On top of product and distribution problems, M&L revealed that the seller was well aware that another major foreign company was planning to establish a competitive position. This new player had met them several times to negotiate the acquisition and had decided to enter the market alone.

Implications

The outcome of the market due diligence allowed the buyer to gain over US$35 million during the next round of negotiation.

MARKET DUE DILIGENCE USUALLY SAVES LARGE AMOUNTS ON THE BUYERS SIDE